What Is an Overdraft?

When you don't have enough money in your financial account to cover a transaction, but your institution respects it anyway, they say you have an overdraft. An overdraft allows you to continue using funds in your account even when your account has a negative balance, but you must pay the money back and usually pay a fee.

Let's take a look at how overdrafts work and the different ways your bank or credit union can charge you when your balance drops below zero.

What is an overdraft?

An overdraft occurs when a transaction exceeds your available balance and your bank or credit union covers the cost. With an overdraft, the financial institution still expects you to pay the amount that was awarded to you. Also, an overdraft fee is often charged, making the transaction even more expensive.

How does an overdraft work?

An overdraft can be caused by any action that results in a negative account balance. This can include:

An automatic payment that is deducted from your account when you don't have enough money to cover costs.

A check you wrote is deposited and deducted from your account later than expected, and you don't have the funds available to cover your next purchase.

Make a debit card purchase in person or online and it will be approved, even if there isn't enough money in your account to cover it.

When you make a purchase that brings your account balance below zero, banks decide to reject the purchase or pay for you by withdrawing the overdraft from your account.

Most of the time, a bank or credit union will base the overdraft on your available balance - the amount of money in your account that you can spend, withdraw, or cover transactions. Sometimes the indicated balance is different from your available balance, so be sure to check your available balance and see what the bank thinks you can spend.

Also, keep in mind that banks can request transactions in different ways, reducing your available balance. For example, a debit can be withdrawn before a credit is applied, which can result in an overdraft, even if you think you have sufficient funds in your bank account.

Depending on the bank, overdrafts will be handled in a number of ways. There is no way to handle an overdraft. Additionally, there are different fees associated with each type of transaction and overdraft action.

Overdraft protection

An overdraft is an agreement between you and your bank to cover withdrawals from a checking account, which generally includes a fee. If you choose an overdraft when opening an account at your bank, you will generally have a few different options:

Standard Overdraft Practice - This is usually the default and covers certain transactions, such as automatic payments and recurring debit purchases, including a gym membership or monthly membership service.

Overdraft Protection: In some cases, a bank or credit union may allow you to link your savings account to your checking account as backup. When an overdraft occurs, money is automatically transferred from the linked account and deposited into the transaction account. Depending on the institution, this service may be free. For example, Chase offers this form of protection for free, while Wells Fargo charges a fee.

Debit Card Coverage: If you want your debit transactions to be carried out, even if they are not recurring accounts, you can ask for this service. However, there is usually a fee associated with each transaction.

Your bank may use different terms when referring to the types of overdraft options, so it is important to read each description carefully. Plus, you can decline overdraft protection and save money on overdraft fees. However, if a payment is returned due to insufficient funds, you may still have to pay a returned payment fee.

Overdraft fees

Fees vary by bank or credit union. However, the average cost of an overdraft fee is $ 35 per incident, according to the Pew Center on the States. Also, even if you have overdraft protection that involves an automated transfer, you may still incur a fee. Pew reports that it is common to see a fee of around $ 10 for these transfers, although not all banks charge this fee.

Also pay attention, as some banks and credit unions classify overdrafts as a line of credit. If that's the case, you may end up paying interest on the overdraft amount until your financial institution pays you the amount up front.

We hope you enjoy watching this video about overdrafts

Source: ASB

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